The next three months are going to be stressful for investment bankers at Barclays. Sometime in February, Antony Jenkins, Barclays’ CEO, will present his plans for the future. Anything could happen. According to a recent article in the Financial Times, Jenkins has yet to make up his mind about what to do with the investment bank. In the meantime, Project Mango, run by investment bank CEO Rich Ricci, is said to be drawing to an end, and has mapped the viability of the investment bank, business area by business area.

To compound the apprehension, analysts at investment banks are very busy producing reports suggesting that Jenkins is going to be harsh with his 22,000+ investment banking staff. First JPMorgan Cazenove investment bankers said the investment banking won’t be viable unless £1.1bn in costs are taken out. Now, analysts at Goldman Sachs are claiming that Barclays would probably be better off without its investment bank. The investment bank should be spun off, says Goldman, except no one would buy it.

The charts

Goldman’s analysts make their point with the charts below.

1. Earnings at Barclays’ investment bank are below their target.

2. And so are returns.

Returns in the investment bank are substantially below their target and the situation is only going to get worse. During the first nine months of 2012, Goldman’s analysts say Barclays’ investment bank generated returns of 13% (when proportional head office costs are included). This was good, and compares to just 9% for the group as a whole. However, Basel III, the UK bank levy and the UK ring fencing reforms proposed by the Independent Commission on Banking, will all take their toll. Barclays’ investment bank needs to generate returns of 11.5% to cover its cost of equity, say analysts at Goldman. This won’t happen without restructuring. If the current situation continues, Goldman’s analysts predict the return on equity at Barclays’ investment bank will fall to 10-11% next year under new capital rules and ringfencing.

3. If Barclays simply got rid of its investment bank, returns for the overall group would be much, much higher.

The good news is that Goldman’s analysts don’t think a divestment is likely. The investment bank is simply too big: it has a £1.2 trillion balance sheet and leverage levels of 60 times on a stated basis and 30 times when everything is netted out. Few banks would have the wherewithal to buy it and Barclays investment bank is too leveraged to stand on its own.

The bad news, is that Goldman’s analysts think the only alternative is widespread redundancies and a substantial cut in investment banking pay.

The cuts are coming are Barclays

To remain viable, Barclays investment bank needs to cut costs. The most obvious place to cut from is the compensation bill. Costs accounted for 59% of the investment bank’s income in the first nine months of 2012, say Goldman’s analysts. 66% of those costs went to compensation.

Barclays investment bank has two choices, say Goldman’s analysts.

1. The investment bank can keep headcount stable and cut compensation by 30%.

If everyone at Barclays investment bank is to keep their jobs, Goldman’s analysts say they will need to maintain productivity per head stable at £450k and accept a 30% pay cut. This isn’t seen as viable.

2. The investment bank can seriously restructure

Alternatively, Barclays can engage in some serious restructuring. Given Barclays’ lack of traction in equities and equity capital markets outside the US, Goldman says it would make sense for the bank to pull back from equities in Asia and in some areas of Europe. It would also make sense for the bank to pull out of M&A and advisory work in Asia Pacific. 3,500 jobs would go as a result.

The cuts aren’t coming at Barclays

Barclays declined to comment on speculation about Jenkins’ plans for the investment bank. However, one senior equities banker at Barclays categorically told us last week that there are no plans to cull the business.

Ian Gordon, an analyst at Investec, says Goldman’s analysts are overdoing the need for job cuts. “I wouldn’t expect the rationalisation at Barclays to be on the scale of 3,500 people,” he says. “Nor would I expect them to pull back from Asia. It’s a profitable business generating good returns. The only thing that has changed in the past six months is that revenues at the investment bank have held up and costs have gone down, making the business more attractive.”

If you work at Barclays, who do you believe – Gordon, or Goldman? Unfortunately, it will be well into the new year before the correct call is revealed.